After all the writedowns, the deep cost-cutting and heart-stopping declines in stock prices, gold mining investors still wrestle with one question: Can it get worse?
That fear weighs heavily on Barrick Gold Corp. this week, with the world's largest gold miner reporting earnings Thursday. The company has already recorded $4.2-billion (U.S.) in writedowns since January and suffered a debt downgrade in April, but there are worries that more negative surprises are in store.
TD Securities Inc. analyst Greg Barnes has estimated Barrick could book impairment charges totalling as much as $10-billion in the second quarter.
"Virtually everything that could go wrong has already gone wrong," said analyst George Topping at Stifel Nicolaus. And yet, "you've got to think most of their other assets will suffer writedowns when they apply current gold prices" to valuing them.
Both before and after the financial crisis, Barrick, led by strong-willed founder and chairman Peter Munk, pursued an ambitious growth strategy, developing assets in South America and expanding into copper production with its $7.3-billion acquisition of Equinox Minerals. The plans were predicated on elevated metals prices, but gold has since plummeted to $1,325 (U.S.) per ounce from its high of $1,900, and copper now trades for $3.05 per pound.
When Barrick bought Equinox, it hoped copper would stay above $4 per pound for the foreseeable future.
Earlier this year, the miner shocked the market by writing off $3.8-billion of the Equinox acquisition – more than half the total cost – and the bad news has kept rolling in since.
A month ago, Barrick took the extraordinary step of slashing capital spending by up to $1.8-billion (Canadian) at its Pascua Lama project in Chile and Argentina, while also warning investors the project's delays could result in an after-tax impairment charge of between $4.5-billion and $5.5-billion. The fear now is that this preliminary estimate will soar.
Stephen Walker at RBC Dominion Securities also expects up to $1-billion to be written off this quarter because current metal prices have made some projects, such as the Jabal Sayid copper mine in Saudi Arabai, much less profitable. On top of that, Barrick disclosed that week that its sale of its energy unit, Barrick Energy, for below book value, resulting in a $500-million impairment charge.
"We believe that there is a high probability of negative surprise in the quarter, primarily surrounding further asset writedowns, potential for guidance revisions, and high probability of a dividend cut," Mr. Walker noted.
Across the industry, Barrick's peers have also suffered recent writedowns. Canadian gold miner Goldcorp just wrote off $2-billion attributed to its Penasquito mine in Mexico, and Australia's Newcrest Mining recently incurred a $6-billion (Australian) charge stemming from its troubled $9.7-billion acquisition of Lihir Gold Ltd. three years ago.
While writedowns are sometimes shrugged off as non-cash charges – meaning the miners simply erase future value but don't actually cough up cash – Barrick is in the spotlight because of what any writeoffs portend. By lowering its project values, the company is telling investors that it expects to receive less income from them over the life of the mines. That worries some observers because Barrick had more than $14-billion in long-term debt outstanding as of March 31, and lower cash flows makes it harder to repay this burden.
This debt load is one of the main reasons rating agency Standard & Poor's downgraded Barrick's debt to BBB from BBB-plus two months ago. The rating agency said another downgrade could come if Barrick's debt rises to three times its earnings before interest, taxes, depreciation and amortization, and as of late June, the multiple was 2.5 times, according to S&P.
Still, it is unclear just how much any writedowns will weigh on Barrick's stock price. At $17.72 per share, the stock is already at levels last seen, until very recently, in 1992.
Mr. Topping, for one, believes the gold price will have a much more dramatic effect on the company's valuation in the near future because it demonstrates just how capable the miner is of paying back its debt. "The main parameter is the gold price," he said.